Plantation – Singapore - Expect Higher FFB Production In 2018

All companies under our coverage performed within expectations in 4Q17, except GGR. FFB production was weaker q-o-q in 4Q17 due to a lagged impact from the drought. The weak production is expected to continue in 1Q18 as the quarter is a low production period.

For 2018, we forecast FFB production for our coverage companies to grow 8-20% y-o-y. We expect CPO prices to show weakness, especially in 2H18, as palm oil is likely to be in oversupply.

Maintain MARKET WEIGHT.

WHAT’S NEW

4Q17 results wrap-up.

4Q17 results of Bumitama (BAL), First Resources (FR) and Wilmar International (WIL) were within expectations, while Golden Agri (GGR) was below expectations mainly due to weaker-than-expected contribution from the palm & lauric and oilseeds segments.

Bumitama (BAL) registered the highest q-o-q earnings improvement in 4Q17 despite weaker FFB production, largely attributed to lower operating costs as most of its fertiliser costs were booked in 9M17.

All the companies registered significant improvement in y-o-y earnings for 2017 on the back of higher FFB production and better CPO ASPs.

FFB production dropped in 4Q17…

All plantation companies under our coverage registered drop in FFB production in 4Q17 (by -1.0% to -16.7%), except for First Resources (FR) which reported a q-o-q increase.

…due to uneven recovery patterns depending on rainfall.

We understand that the drought in Riau ended earlier than in Kalimantan. First Resources (FR) registered a better q-o-q FFB production as most of its estates were in Sumatra where the lagged impact from the drought ended earlier. Companies which have the majority of their estates in Kalimantan, such as Bumitama (BAL) and Dharma Satya Nusantara (DSNG), showed q-o-q declines in FFB production in 4Q17 due to the lingering effect from the drought.

FFB production to grow 8-20% in 2018.

The companies under our coverage guided FFB production growth of 8-20% y-o-y for 2018. Golden Agri (GGR) guided the lowest FFB production growth due to its old tree age profile with declining FFB yield. Bumitama (BAL) guided the highest FFB production growth of 15-20% on the back of FFB yield recovery and supported by contribution from new mature areas. Wilmar International (WIL) and First Resources (FR) expect FFB production growth of 10- 12% and 10-15% respectively as the improvement from FFB yield will be partly offset by replanting activity.

OER to improve in 2018.

The weaker OER in 1H17 was due to high rainfall leading to high water content in the fruit and partly affected by lagged impact from the drought. For 2017, most of the companies under our coverage reported flat y-o-y OER except First Resources (FR) which reported a marginal decline.

Potentially higher biodiesel volume to be awarded.

From our channel checks, we gather that the biodiesel volume to be awarded in Apr 18 is likely to be higher than in previous contracts. This is partly due to the recent strengthening in crude oil prices and the weakening of CPO prices which narrowed the CPO premium against Brent crude oil, making the biodiesel programme more financially viable.

The increase in biodiesel volume is positive for Wilmar International (WIL), First Resources (FR) and Golden Agri (GGR).

ACTION

Maintain MARKET WEIGHT.

We maintain our view of a significant CPO price weakness going into 2018 as palm oil is likely to be in oversupply by mid-18. Moreover, ample soybean supply is likely to pressure soybean prices, in turn capping palm oil prices.

We have HOLD calls on First Resources (FR) and Golden Agri (GGR) as we reckon that the higher production and earnings expected for 2H17 are priced in.

ESSENTIALS

Replanting activity in 2018.

All the companies under our coverage have guided replanting targets for 2018, except for Bumitama (BAL) which has only 2% of trees at above 18 years old as of Dec 16 and these have been replanted in 2017.

Replanting activity will dilute FFB yield growth in the next 3-4 years, but it will ensure sustainable FFB production growth in the longer term.

Higher CPO production to improve downstream utilisation and profitability in 2018.

Global palm oil production is expected to increase 5.2% to 70m tonnes. The higher palm oil supply will help maintain refinery utilisation rate. This is positive to the downstream businesses of Wilmar International (WIL), Golden Agri (GGR) and First Resources (FR).

ASSUMPTION CHANGES

We maintain CPO prices assumption of RM2,400/tonne and RM2,500/tonne for 2018 and 2019 respectively.

SECTOR CATALYSTS

Higher-than-expected rainfall that will affect harvesting and transportation.

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